Why Hurricane Harvey could be good for stocks

The devastation wrought by Hurricane Harvey is heartbreaking and vast, and the areas hit hardest by epic floods will take months to recover, if not longer. But there may be an unexpected upside to the disaster: It could force Congress to set aside the usual gamesmanship this fall and do its job. And financial markets would be among the winners.

Congress has a busy calendar once it reconvenes on Sept. 5, with two urgent orders of business. The most important is raising the government’s borrowing limit by the end of September, averting the risk that Uncle Sam won’t be able to pay the bills. Congress must also pass spending legislation that will keep the government functioning once the new fiscal year begins Oct. 1.

These ought to be routine matters, but of course they’re not. In recent years, factions have held up must-pass legislation to create a crisis and, in theory, maximize the leverage needed to attain political goals. Conservatives in particular have tried to use the threat of debt default and government shutdown to push for sharp spending cuts. The brinkmanship led to the first-ever downgrade in the U.S. credit rating in 2011, and a deeply unpopular 16-day shutdown in 2013.

Washington has been bracing for similar warfare this fall — but Harvey has now changed the outlook somewhat. Congress will now have to come up with emergency funding to help cover the cost of dealing with the disaster, including financial assistance for thousands of families who lost their homes and municipalities facing monumental reconstruction efforts. It won’t be a lot of money by Washington standards— $5 billion, perhaps — but the money will be a lifeline to those suffering as the floodwaters recede.

Conservatives in Congress don’t face much blowback in their districts for trying to cut government funding, since the voters who elected them generally favor that. But few politicians want to block aid for people who desperately need it. Republican leaders in the House and Senate know that, which is why they’re now likely to tie post-Harvey disaster funding to the bigger spending bills, or a debt-ceiling increase, or both. If they do, anybody who wants to kill the spending or borrowing provisions will also be voting to kill disaster aid.

Government shutdown looks unlikely

Goldman Sachs recently published research saying the probability of a government shutdown in October has dropped from 50% to 35%. “Recent events have lowered the odds of a government shutdown or a delayed debt ceiling hike,” Goldman analysts wrote. “Allowing a partial government shutdown when federal relief efforts are underway would pose greater political risks than under normal circumstances.”

This is good news for financial markets, which have shown signs of anxiety recently over the looming budget showdowns in Washington. Breaching the debt ceiling would be most worrisome for markets, and perhaps disastrous; when Congress flirted with that possibility in 2011, stocks plunged and took six months to recover. Shutdowns aren’t as destructive, but they nonetheless distract businesses and investors and do more harm than good.

Even if the need for disaster funding raises the maturity level in Washington for a while, there’s still plenty that could go wrong. President Donald Trump, not surprisingly, may be the biggest wild card. Before Harvey roared into Texas, he said he’d shut down the government if Congress didn’t appropriate $1.6 billion he wants as a down payment on his border wall. So Trump himself could be the one who kills spending bills by vetoing them, perhaps insisting that disaster funding be passed on its own, reigniting the showdown over the debt ceiling and the budget. In Washington, harmony can morph into conflict faster than a giant storm can swamp a sewer drain.